Banks' performance in Q2 to be a mixed bag

Banks' performance in the July-September is expected to be a mixed bag. Public sector banks might report a subdued growth in profits, with higher provisions for bad loans and restructured assets. Private banks were expected to show better growth in their bottom lines, said bankers and analysts.

ICICI Securities (I-Sec), in a preview of the results, said the growth in net interest income would show improvement (sequentially), due to a drop in the cost of funds. Deposit rates are trending down as the Reserve Bank has eased liquidity via cuts in the Cash Reserve Ratio and Statutory Liquidity Ratio, resulting in funds costing less. Bulk deposit rates have dipped by about 300 basis points from the highs of March, it said.

Motilal Oswal Securities Ltd (MOSL), another broking firm, said asset quality would remain the most important driver of performance n profits after tax. Private banks are likely to report better earnings and asset quality performance, compared to public sector banks.

The growth in net profits of private banks is expected to be 23 per cent (year-on-year), while their state-owned counter-parts will report 8.6 per cent increase, MOSL said.

Reflecting pain from an adverse business and economic climate on companies, the results might again disappoint on asset quality for many government-owned banks. The higher incidence of slippages (non-performing assets) and weak operating growth would weigh on the performance.

Bank of India, Union Bank of India and Canara Bank might disappoint on earnings and asset quality, said Bank of America Merrill Lynch. While State Bank of India's gross slippages are likely to be 30 per cent lower, quarter on quarter, these might also be higher, at Rs 7,500-8,000 crore.

I-Sec said the easing of yield on government bonds would be beneficial for banks. The yield on 10-year government bonds has dipped from 8.38 per cent to 8.15 per cent in the quarter.

This is more beneficial to banks such as Axis, SBI and Punjab National, which have a larger portfolio of securities available for sale.